Dropbox – The Power of a “Value Based” Startup

Drew Houston, CEO/Founder of Dropbox, gave an amazingly forthcoming presentation at the Startup Lessons Learned Conference chronicling his team’s path from idea to their current position as one of today’s hottest startups.

Because of the importance of protecting user data, they modified the “launch early, launch often” mantra to “learn early, learn often.”  And they aspired to gain the “best understanding of customers as early as possible.”

My favorite quote from Drew’s presentation highlighted the power of focusing on what is really important: “If you make a feature matrix of Dropbox versus all the other products out there, we’ll never come out in front.  We wanted to do a few things [really] well as opposed to a lot of things kind of well, presented in a way that’s confusing.”

Dropbox struggled to find effective paid marketing channels, but Drew states: “The one thing that saved us was that we put all of our effort into something that worked, that was an elegant solution.”  They then empowered extremely gratified users to spread the word about Dropbox.

The result: In 15 months, Dropbox attracted 4 million users.  In the last 30 days users have sent 2.8 million direct referral invites.  Watch the video, you’ll definitely learn something.  During my time with Dropbox, I learned how to build a sustainable startup (and business in general) the right way.


Watch live video from Startup Lessons Learned on Justin.tv

Steve Blank’s SLL Keynote – It’s a “Must Watch”


Watch live video from Startup Lessons Learned on Justin.tv

Some of my favorite quote are:

Role of the Entrepreneur

  • Your job as an entrepreneur in a startup is to search for a repeatable and scalable business model. When you find it, your job is to build a company around that business model.
  • Search for a business model rather than write a business plan. Biz model is how a company makes money.
  • Customer and agile development is how you search for a business model.
  • You fail if you stay a startup – goal is to become a large company.  Search is bringing order out of chaos, pivoting all the time.
  • Goal is not to becoming the world’s most fun startup. Goal is to become a valuable company.
  • No business plan survives first contact with the customer.

Differences Between Startups and Established Companies

  • Startups search and pivot; companies execute.
  • Very different skills needed to execute a business model compared to those needed to search for a business model.
  • Customer development = hypothesis testing, minimum feature sets and pivoting.  Product management is very different than customer development.
  • You need to brainwash and deprogram product managers if you want them to perform customer development.
  • Key startup numbers are not: balance sheet, income statements and cashflow.  They are cash, viral coefficient, customer acquisition cost, burn rate, average transaction size…

Want more Steve?  Check out his blog.

Early Detection is Key

Following the Startup Lessons Learned conference, I had the Founder/CEO of a startup tell me that she finally ran the Survey.io customer development survey. She was thrilled to discover that more than 40% of her users considered her product to be a “must have.” She had avoided running the survey earlier for fear of a disappointing number. But now that she has run it, she can confidently start planning the steps needed to scale her business (see Startup Pyramid post).

Her fear is common among many startup founders. We have so much invested in the vision (especially emotionally), that we dread an inconvenient truth standing in the way of our dream.

The fear reminds me of one of my personal life missions. Over the last five years I’ve strongly encouraged my friends to get physical exams – especially entrepreneurs consumed by their startups. I know how hard it is to make time.  At perhaps the most intense period of scaling LogMeIn I was putting off a routine physical exam. I felt healthy, so why worry? But I gave up half of a day anyway and finally got a complete checkup. It turned out that I had the very early stages of bladder cancer. A simple procedure removed the cancer and I haven’t had any signs since. But if I had waited just a few more months, my doctor explained that the prognosis would have been a lot scarier. If you haven’t had a physical exam recently, please make the time. It could save your life.

And on a much lighter note, if you haven’t run the customer development survey on Survey.io, just do it (it’s free). If too few people consider your product a “must have”, you’ll want to pivot/course correct as early as possible.

A Lean Start is Smart

Lean Vs Fat Startups
When I read Ben Horowitz’s article “The Case For The Fat Startup” http://bhorowitz.com/2010/03/17/the-case-for-the-fat-startup/ I expected to be in violent disagreement with most of it.  However, I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.
So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?
Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he claims startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.
This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).
Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.
Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

When I read Ben Horowitz’s article “The Case For The Fat Startup” I expected to be in violent disagreement with most of it.  So I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.

So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?

Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he recommends startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.

This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).

Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.

Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

Note: Eric Ries clears up some of the common mis-perceptions about lean startups in this post.

Optimization Mistakes that Kill Startups

I once believed optimization was the secret weapon that could make almost any startup successful. It was certainly a critical part of reaching millions of users in each of my first five startup marketing roles. At a couple of startups we saw a tripling of conversion rates from a single experiment. When we tripled conversion rates, we tripled the effectiveness of every future marketing dollar.

I first became a fan of funnel optimization at one of my early startups where we had hit a wall trying to develop scalable customer acquisition channels.  We decided to temporarily stop trying to find new customer acquisition channels and focus instead on improving conversion rates.  A few months later we resumed channel building and were able to scale the same previously tested channels to support 100X the marketing spend with the same target ROI per dollar spent.  Beyond the clear benefit of enabling scalable marketing campaigns, the improved user experience also resulted in a multifold increase in free organic growth.  User growth immediately hockey-sticked and years later still  hasn’t diminished.  All the while, the company maintained cashflow positive results.

These benefits probably have you chomping at the bit to start your own optimization program. But be careful, optimization can easily kill a startup when not done right (or at the right time).

Here are the three most common optimization mistakes startups make:

1) Premature optimization – Optimization is about improving the path that users take to reach a certain destination within your website. For most sites it’s ultimately about getting people to experience and buy your product. While this seems like an important goal from the beginning, it’s not. If the value of your core product is weak, doubling the percentage of users that get there won’t help much. And it will actually hurt you because every unit of effort put into optimization is one less unit that you can put into improving your core product. Products that don’t become a “must have” almost always fail.

My recommendation for startups is not to begin optimizing until at least 40% of your randomly surveyed users say they would be “very disappointed” without your product. That doesn’t mean you shouldn’t try to have a great first user experience, rather it means you shouldn’t start iterating flows until the core product meets this threshold.  The only exception to this is if your value proposition will increase because of a network effect (like eBay). I’ll try to write a post on this scenario soon.

2) Not being deliberate –To execute full funnel optimization you test multiple changes at every step in the acquisition process. Since every change is also an opportunity to screw things up it’s extremely important to measure the actual results of a change. Unfortunately traditional analytics programs aren’t helpful here since they don’t track specific user cohorts moving through the funnel (AKA groups of users). In the early startups I worked with we spent months building systems internally to track conversions at the user level. Fortunately “off the shelf” systems are now cropping up that make user level funnel tracking much easier (I’ve been advising KISSmetrics on such a system for over a year and I’m now using it in a couple projects). With the right system you can track your “measures of success” and roll back any changes that havea negative effect on these metrics.

This presents a new problem. Anyone with a basic understanding of statistics will realize that optimization is a numbers game. If you test enough things you will definitely find something that improves your key measures. That’s the theory, but the reality is that you’ll never get past the first few tests if the early ones don’t yield improvements. People quickly lose faith in the process. Therefore it is essential to vet every test idea before asking the development team implement it. Prioritize test ideas so that the easiest and/or most likely to improve results are implemented first.

3) Killing the love – One thing that is rarely measured in an optimization project is a reduction in the core value perceived by your most passionate users. Your ability to deliver an experience that creates passionate users is your most important asset as a business and must be protected. It can be improved, but it must be done very carefully. The first step in protecting it is to understand it. I never attempt an optimization project without first doing a project that helps me understand the use cases of the most passionate users. After this initial project, which I combine with messaging optimization, I am in a much better position to safely optimize the full conversion funnel.

Effective optimization requires the right tools, qualitative research/understanding and a systematic approach to testing. When executed properly it can easily result in 2X – 10X improvements in conversion rates. No business will come close to its potential without a concerted optimization effort, but be careful to avoid the mistakes listed above.

For more context on where optimization fits into the overall startup marketing priorities, see this post on The Startup Pyramid.

Bringing Your Product to Market

I’ve just completed a hectic week of marketing workshops with startups in the UK and Ireland.  There were insightful contributions from most of the attendees – the collective marketing discoveries of startups that conduct metrics driven experiments is amazing.

In Ireland we went deep in an all day session that included war stories from the founders and marketers that grew two very successful Irish companies – Hostelworld.com and Paddy Power.   Hostelworld.com offers useful insights into an effective way to bring a “network effects” startup to market.  I’ll try to get permission from the team to write a case study.  Both companies provided additional validation to the recommendations in this post – http://startup-marketing.com/the-startup-pyramid/.

In other news, part 2 of my Venture Hacks interview is now live (bringing your product to market) – http://venturehacks.com/articles/sean-ellis-interview-2 .  Nivi and I discuss what to do after getting to product/market fit.  I’ve blogged about most of this stuff before, but there are a few additional details that Nivi was able to extract through his insightful questions.

When PR for Your Startup?

This post is by Joe Eckert, the most effective PR executive I know (we worked together at LogMeIn).  Joe has played a critical role helping startups generate press coverage as both an inside VP and on the agency side.  He is now at Baker Communications Group. 

Given my limited PR knowledge, I asked Joe to write this guest post to help you begin your startup’s PR program.  – Sean

When PR?

Because we specialize in communications for high tech start-ups, we’re often asked “when should I start a PR program?” 

It’s a simple question. The simple answer (often given) is: “No time like the present.”

The real answer is bit more complex. We always ask prospective clients about their strategic company goals, as well as near- and long-term product plans so that we can help the management team determine whether a PR program can be helpful – and sustainable.

Once all parties agree that the time is, in fact, “now”, we go about the work of creating and executing the strategies and tactics that will help support the corporate vision. One of the first things we look at is helping a client generate a fairly steady stream of “content”.

Content is King

A good PR firm will help guide you and “tease out” the information that will help communicate your value and credibility to customers and partners. Part of your commitment to the PR process is to make sure the company is ready to handle the increased attention that comes with an effective and successful PR program. PR places additional demands on executives and managers who are designated as spokespeople or who otherwise have a stake in the PR process.

Content can begin – and often should begin – with company/product strategy communicated in the form of industry analyst discussions. This foundation work often precedes a more “public” PR campaign, It can also be combined with social media activity and/or “wire press releases” – two examples of content distribution tools. Knowing who is watching you and who you should be watching can often dictate the type, style and frequency of the content. But the key is that a lot of PR deliverables are no longer just media stories. They ARE company-created content that adds value and context to the more traditional media channels.

The Good (Bad?) Old Days

Not so long ago, PR lived in a relatively simple world of communication to the traditional press, who then processed, fact-checked and distilled that information before sending it out to the world. Today’s PR landscape is quite a bit more complex.

Before embarking 10 years ago into the land of the start-up, I and most of our team here spent time at large companies (IBM, Compaq, HP) where the simple rule was don’t communicate unless you get coverage in the press. Today, we’re seeing a disaggregation of traditional media “centers”, however, and now direct forms of communication are supplementing (not supplanting) the role of media. Take blogs, for example. They have become a significant supplement to traditional media and, in fact, many reporters also do double duty as bloggers. And, of course, companies and organizations have their own blogs, which add to the content volume. The influence of Twitter is well documented (ironically, in the traditional media).  Even CUSTOMERS are publicly influencing the buying decisions of other customers. So, today, the press release, the company blog, the analyst deck all take on significance in addition to, and beyond the role of media in delivering content.

While scary (for some), companies must be willing to communicate with their customers and potential customers in an almost 1:1 fashion, or at least to appear that way. You might be thinking “that’s marketing.” And, in a way, it is, but it’s marketing using the tools, language and credibility of public relations/media. And, of course, it’s also using the traditional PR tools FOR press articles and analyst reports.

PR is not a magic bullet. Just as with building a sales and marketing organization – indeed an entire company – an effective PR program builds up over time with activities strategically dictated by what stage the company is at and where it wants to go.

So, when PR?

Ask a simple question…

We welcome your comments about your own experience with startup PR and/or any questions for Joe.  – Sean

Audio Interview on Venture Hacks

I recently sat down with Nivi from Venture Hacks and discussed what it takes to build a successful startup.  The full conversation is available here.  There have also been some great thought provoking questions that I’ve answered in the comments section following the Venture Hacks post.  Please jump in and join the conversation over at Venture Hacks.